German Business Confidence Improves On Stronger Expectations: Ifo

(RTTNews) - Business morale in Germany rebounded more than expected in October as companies' expectations were the strongest in over three-and-a-half years, though they gave a weaker assessment of the current situation for a third month in a row, results of a closely watched survey by the ifo institute showed on Monday.

The ifo business climate index climbed to 88.4 points to 87.7 points in September. Economists had expected a score of 88.

The current conditions index slid to 85.3 from 85.7 in September. Economists had expected the reading to improve to 86 this month.

The expectations measure rose sharply to 91.6 from 89.8 in the previous month. The latest reading was the strongest since February 2022, when it was 98.2.

"Companies remain hopeful that the economy will pick up in the coming year," Clemens Fuest, president of the Munich-based think tank, said.

Expectations improved in manufacturing, services, and trade, but were more pessimistic in construction, the survey revealed. Assessment of current situation was weaker in manufacturing and trade, while the views were revised slightly upward in services and construction.

A pause in the declining trend in new orders led to the improvement in morale in the factory sector. Capacity utilization increased by a point to over 78 percent but remains well below the long-term average of above 83 percent.

The strengthening in sentiment in the services sector was largely due to improved confidence in tourism and IT services.

A boost in morale in the wholesale trade led to the stronger confidence in the trade sector, while the construction industry continued struggle, mainly due to a lack of orders.

The ifo survey results were slightly in contrast to those of the S&P Global purchasing managers' survey last week that showed a broad-based easing of businesses expectations for the year ahead.

The PMI survey showed that the German private sector logged the strongest expansion in almost two-and-a-half years at the start of the fourth quarter, largely led by a solid increase in services business activity.

While both manufacturing and services companies remained confidence of growth in the next 12 months, their overall expectations eased further below the long-term average to the weakest since April.

Despite winning new projects for next year, businesses were worried about an outlook marred by domestic economic weakness, geopolitical tensions, rising costs, business relocations to cheaper regions and deteriorating international competitiveness, the PMI survey showed.

Commerzbank economist Jorg Kramer said the trend for the Ifo index, as well as the Purchasing Managers Index, continues to point upwards. The bank has projected 1.4 percent growth for the economy next year and expects the government's fiscal stimulus to be 8 percent of GDP.

"Starting early next year, the fiscal package is expected to boost the German economy," the economist said.

"With a fiscal stimulus of almost one percent to GDP, this is hardly avoidable. However, the higher growth is likely to prove more of a flash in the pan due to the lack of structural reforms."

ING economist Carsten Brzeski said the latest Ifo index suggests that German businesses still hope that the fiscal stimulus will save the economy, even if the economy is heading for a third consecutive year of stagnation.

"With all the headwinds from trade, the exchange rate and geopolitics, it is hard to believe that today's Ifo index marks a turning point," the economist added.

Statistical office Destatis is set to release the preliminary estimates for third quarter GDP on Thursday. The biggest euro area economy is widely expected to have stagnated in the September quarter following a 0.3 percent contraction in the previous three months.